Japan’s controversial cross-shareholdings get second wind after court

By Makiko Yamazaki

TOKYO (Reuters) – A simmering Tokyo legal battle could embolden Japan Inc to hang on to cross-shareholdings as a defence against hostile takeovers, a setback for corporate governance reforms championed under former Prime Minister Shinzo Abe.

The development threatens to sow uncertainty at a time when investors are trying to gauge new premier Fumio Kishida’s commitment to pro-market reform and attracting international investors.

The Tokyo District court last month ruled manufacturer Tokyo Kikai Seisakusho could issue a poison pill, rejecting a request for an injunction from top shareholder Asia Development Capital (ADC), which sought to block the move after being excluded from voting on it.

In the absence of ADC, other shareholders approved the poison pill. Owned by Malaysian businessman Anselm Wong, Tokyo-listed ADC built up most of its 40% stake in a matter of weeks, enough to give it veto rights over important board decisions.

Tokyo Kikai’s other shareholders include its business partners, reflecting the common practice in Japan where companies take stakes in partners to cement relationships.

“Cross-shareholdings and special shareholders of various kinds continue to insulate management from having to serve the interests of general shareholders,” said Tokyo-based corporate lawyer Stephen Givens.

Tokyo Kikai said ADC was excluded https://www.reuters.com/business/sustainable-business/court-battle-raises-question-how-far-will-japan-swallow-poison-pills-2021-10-21 from voting because it was an “interested party”, adding members of company management were also excluded.

But ADC says the fact shareholders with ties to Tokyo Kikai were allowed to vote – including insurer Sompo Japan, Mizuho Bank and Sumitomo Mitsui (NYSE:) Banking Corp – shows the “interested party” definition was arbitrarily applied.

“Interested parties, if broadly interpreted, could also include shareholders with cross-shareholding or business interests,” said Kazunori Suzuki of Waseda Business School.

On Tuesday, the Tokyo High Court dismissed ADC’s latest appeal. The fund has appealed to the supreme court.

Sompo Japan said it holds Tokyo Kikai shares for strategic purposes. It said its policy is to contribute to the sustainable growth of investee companies, and that it exercises its voting rights appropriately, taking into consideration corporate governance and compliance.

Mizuho and SMBC declined to comment on individual shareholdings. Both banks said they vote appropriately at investee firms. Mizuho said its voting took into account governance and long-term value.

‘COERCIVE’ BIDS, OPAQUE HOLDING

To be sure, some economists such as Cambridge University’s Ha Joon Chang say cross-shareholdings – like the presence of workers on company supervisory boards in Germany – can serve as a check on…